Introduction

The Minister for Finance delivered his Budget on 5 December, 2012.  The Budget measures are expected to generate tax increases of approximately €1.25bn and expenditure cuts in the region of €2.25bn.  As unpalatable as they are, the Budget measures represent an important continuation of the steps we need to take to address the imbalance in the country’s public finances.  The steps that are being taken send a consistent and significant message to the international community that Ireland is prepared to take the difficult decisions to put its finances in order.  As with previous Budgets, the measures will have an impact across society as a whole.  However, the Budget deficit needs to be contained and economic growth needs to be supported.  Budget 2013 represents the furtherance of that process.

Encouragingly, the Minister for Finance noted in his Budget speech that, “there are manifest signs that the country is emerging from the worst of the crisis and that the efforts of the Irish people, despite the hardship, are leading to success” and he acknowledges that, for the Government, a growing and developing economy which provides a fulfilling life and standard of living is the real measure of success.  The Government has recommitted itself to meeting the conditions of the bailout programme and the task of growing and developing the economy, with a particular emphasis on small and medium sized enterprises (“SMEs”). The continuing recovery of the economy is dependant on the success of indigenous enterprise.  In this regard, the Minister for Finance announced the bringing forward of a 10 point Tax Reform Plan to assist SMEs in accessing funding more easily, reducing the costs associated with the administrative burden of the tax compliance process and supporting the creation of jobs.  Some of the key measures referred to in the Budget speech from the 10 point Tax Reform Plan include the following:

  • Enhancing the corporation tax exemption for start up companies to allow unused tax relief to be carried forward;
  • Increasing the threshold for the cash receipts basis of accounting for VAT from €1m to €1.25m and amending the de-minimus level of the close company surcharge to improve cash flow;
  • In a welcome development, the initial research and development (“R & D”) expenditure eligible for the tax credit is to be doubled to €200,000 to encourage innovation and business expansion;
  • The foreign earnings deduction or FED which allows certain employees who carry out part of the duties of their employment in Brazil, Russia, India, China or South Africa (“BRICS”) tax relief on a portion of their income is being extended to other countries to support the export led economy.

The Minister for Finance also announced a new initiative, PlusOne, which is intended to encourage employers to hire individuals that are long term unemployed and which ultimately will replace the current Job Assist and Employer PRSI incentive schemes.  Details of the scheme are to be announced at a later date.  There are also some welcome changes for the aviation sector, the farming sector, the film industry, tourism and the property market.  The latter will welcome the introduction of a new Real Estate Investment Trust regime.  Overall, while the incentives proposed are very welcome and much needed, the limited flexibility available to the Government in this regard is quite evident.

The principal taxation measures of interest to business are summarised below:

Business Tax

Budget 2013 reaffirms the Government’s commitment to maintaining the 12.5% corporation tax rate and no change to the rate was made.  This is in line with the Government’s overall corporation tax strategy including low rate corporation tax, a competitive R&D tax credit regime and the reputation of a transparent corporation tax system with a growing number of international tax treaties.

The current rate of capital gains tax of 30% is to increase to 33% with effect from midnight on 5 December 2012.  For the fifth successive year, the Minister for Finance has increased the rate of Deposit Interest Retention Tax (“DIRT”) from 30% to 33%.  In line with previous years the exit tax on life assurance policies and investment funds will also increase by 3% to 33%.  The new rates are to apply from 1 January 2013.

The Minister for Finance has introduced a number of corporation tax measures as part of a 10 point Tax Reform Plan to help SMEs:

  • The 3 year corporation tax relief for start-up companies provides relief from corporation tax on trading income (and certain capital gains) for new start-up companies in the first 3 years of trading.  This relief will be extended to any unused relief arising in the first 3 years of trading due to insufficiency of profits and can be carried forward for use in subsequent years.  Further details on this are expected in the Finance Bill.
  • The close company surcharge is payable on the total undistributed investment and rental income of a close company.  The de minimus level of the surcharge has been raised from €635 to €2,000.  A similar increase is being made in respect of the surcharge on undistributed trading or professional income of certain service companies.
  • The Budget has proposed an increase of the amount of R&D expenditure eligible for the tax credit regime.  This regime provides for a 25% tax credit for incremental expenditure on certain R&D using 2003 as a base year.  Finance Act 2012 provided that the first €100,000 of qualifying R&D expenditure would benefit from the tax credit without reference to the 2003 threshold.  The Budget has proposed to increase this amount to €200,000.  The Minister for Finance stated that a review of the R&D tax credit will be carried out in 2012. 
  • The annual turnover threshold for eligibility for the cash receipts basis of accounting for VAT is being increased from €1 million to €1.25 million with effect from 1 May 2013.  This change will assist businesses in the critical area of cash-flow and reduce administration.
  • The Foreign Earnings Deduction (“FED”) provides tax relief to employees who are sent to work abroad in certain countries.  The relief was introduced in the Finance Act 2012 and applies to BRICS. The Minister has announced that the relief will be extended to apply to certain other countries with effect from 1 January 2013.

The Budget has proposed a simplified tax regime for charitable donations with a blended rate of relief of 31%, which will apply to all donations irrespective of the donor’s marginal rate of tax.  Self-assessed taxpayers will no longer be entitled to a deduction for their donations and instead the tax relief will be paid directly to the charities by the Revenue Commissioners in line with what is currently done for PAYE taxpayers.  Donations by self-assessed taxpayers will also be removed from the scope of the restriction on reliefs for high earners.

The reduced VAT rate introduced to benefit mainly the tourism industry will remain the same at 9% for 2013. The Minister for Finance emphasised that 2013 is an important year for tourism with The Gathering Ireland taking place next year.

The film investment relief scheme will be extended to 2020 and it is intended that the relief will move to a tax credit model from 2016, all subject to EU approval.  The stated purpose of this change is to direct more tax relief to film production rather than to the investor.

The Irish aviation sector will benefit from the implementation of measures to facilitate the construction of hangars and ancillary facilities.  An accelerated capital allowance scheme over seven years in relation to construction of certain aviation-specific facilities is to be introduced which will operate for a period of 5 years from commencement of the scheme.  Further details will be included in the Finance Bill.

The Minister has announced plans to introduce a new vehicle for property investment through a Real Estate Investment Trust (“REIT”).  A REIT is a globally recognised property investment vehicle, which will take the form of a listed company that will hold investment properties.  The REIT must have a diverse shareholding and no one person or group of connected persons can control a REIT.  Its aim is to provide an after-tax return for investors similar to that of a direct investment in property, while also giving the benefits of risk diversification.  To eliminate the double layer of taxation which typically hinders the holding of property through a company, a REIT is exempt from corporation tax on qualifying profits from rental property.  Instead, the company is required to distribute gains and profits to investors annually.  Income tax or capital gains tax as appropriate will be levied on the investor on those distributions.

Personal Tax

The Minister for Finance has reaffirmed the commitment given by the Government in its programme for Government and has not made any changes to income tax rates, bands and credits.  The Minister stated that he “sees greater fairness of the tax system as reducing the number and amount of reliefs that can be availed of by income earners to shelter their income from tax”.

One of the most significant personal tax measures announced by the Minister for Finance is the proposed increase in the rate of Universal Social Charge (“USC”), from 4% to 7%, for those over 70 years of age and medical card holders with an income in excess of €60,000. This proposed increase will take effect from 1 January 2013.  The current lower rate of 4% of USC, which applies until the end of 2014, will apply to all other relevant individuals.

In order to widen the scope of PRSI, from 1 January 2013, modified PRSI rate payers, (such as hospital consultants) will be subject to PRSI on their trade or professional income and any unearned income. PRSI contributions are to be extended to cover unearned income such as rental income, dividends, interest income on deposits and savings for all other persons from 1 January 2014.  In addition, the minimum level of annual PRSI contribution by self employed individuals will increase from €253 to €500 and the weekly PRSI allowance will be removed for employees.  The Minister for Finance claims that these measures will make a fairer link between the amount of contributions and the significant benefits received.

The Minister for Finance has announced that as and from 1 July 2013, maternity benefit will be treated as taxable income. Maternity benefit, like all other social welfare payments, will be exempt from the USC.  Further details are expected in the Finance Bill.

A significant change announced in Budget 2013 will see the abolition of top slicing relief which could be claimed in respect of termination and severance payments for those in receipt of ex gratia lump sums.  Top slicing relief broadly relates to the amount of tax payable and ensures that the individual’s taxable lump sum is not taxed at a rate higher than their average rate of tax for the three years prior to redundancy or retirement.  This change will be effective from 1 January 2013.

As noted above, the Minister for Finance has also increased the rates of capital acquisitions tax and capital gains tax by 3% to 33%, with effect from midnight on 5 December 2012.

The Minister for Finance has announced a 10% decrease in capital acquisitions tax thresholds in respect of disposals made after midnight on 5 December 2012.  The revised tax free thresholds that will apply to gifts and inheritances taken after 5 December are as follows:

Group A €225,000  

Applies where the beneficiary is a child (including adopted child, step-child and certain foster children) or minor child of a deceased child of the disponer. Parents also fall within this threshold where they take an inheritance of an absolute interest from a child.

Group B €30,150

Applies where the beneficiary is a brother, sister, niece, nephew or lineal ancestor or lineal descendant of the disponer.  

Group C €15,075  

Applies in all other cases.

Indirect Tax

The Minister for Finance has not made any changes to the excise duty on petrol and diesel.  A new relief from excise duty on diesel will be introduced for licensed and road hauliers from 1 July 2013.

While the Minister did not mention it in his speech, Budget 2013 includes proposals to amend the specified rate for Benefit in Kind charged on preferential loans granted to employees by employers.  The Minister for Finance proposes to reduce the rate charged on loans used by employees to purchase an employee’s main or sole residence from 5% to 4% with effect from 1 January 2013.  It is widely believed that this measure is designed to stimulate the property market. The specified rate in respect of non-home loans provided by an employer is being increased from 12.5% to 13.5% with effect from 1 January 2013.

Budget 2013 has proposed increases to Vehicle Registration Tax (“VRT”) and motor tax across all categories from 1 January 2013.  In an attempt to generate an additional sales peak and to stabilise employment in the motor industry, a second registration period will be established.  A separate 3-digit year identifier for the first and second six month periods in the year will be introduced.

The Minister for Finance has announced an extension of the carbon tax which was first introduced on domestic fuels in 2010.  Until now carbon tax applied to fuels such as kerosene, marked gas oil, liquid petroleum gas, fuel oil and natural gas however this will be extended to solid fuels on a phased basis.  A rate of €10 per tonne will be applied from 1 May 2013 and will increase to €20 per tonne from 1 May 2014.

There are also increases in the rate of excise duty for the so called “old reliables” of alcohol and tobacco.  Effective from midnight on 5 December 2012, the rate of excise duty on a pint of beer and cider and a measure of spirits will increase by 10 cent.  A 75cl bottle of wine will increase by €1.  There will also be a 10 cent increase on a packet of 20 cigarettes and a 50c increase on a 25g packet of roll-your-own tobacco.  There will also be a pro rata increase on other tobacco and alcohol products.

Property Tax

Budget 2013 proposes the introduction of the long awaited and much debated local property tax or LPT.  The owners of residential properties, including rental properties, will be responsible for payment of the tax.  In the case of long leaseholders (more than 20 years) or life tenancies, the liability will rest with the tenant.  Co-owners of residential property will be jointly and severally liable for the tax.  The LPT will operate on a self assessment basis by the persons liable to pay the tax.  The Revenue Commissioners will have responsibility for all administration, collection, enforcement and audit aspects of the LPT.

The LPT will be charged on the market value of the property.  The tax liability is to be calculated by applying the relevant tax rate to the market value of the property.  For the first 18 months the “national central rate (of tax)” will be 0.18% for properties valued up to €1m.  In respect of properties valued over €1m, the first €1m is taxed at 0.18% with any excess value over €1m taxed at 0.25%.  From 1 January 2015, local authorities will have discretion to increase or decrease the LPT rates by 15% of the national central rate.

A range of payment options are available enabling persons liable to pay the tax in full or on the basis of instalments.  Where a payment option has not been chosen by the person liable to pay the tax, the Revenue Commissioners will be entitled to automatically deduct it at source from salary/wages, occupational pension income and certain payments from the Department of Social Protection and Agriculture, Food and the Marine. There is provision for a system of voluntary deferral payment arrangements in specific situations to address cases where there is an inability to pay the LPT.  In the case of self employed persons, the Revenue Commissioners will not issue a tax clearance certificate where there is unpaid LPT.  Late filing of an LPT return will be linked to the filing of an income tax return thus exposing a self employed taxpayer to the penalty of a late filing surcharge.  Where the LPT has not been paid, a charge will attach to that property.  The charge will have to be discharged on a sale/transfer of the property.

There are a number of exemptions from the LPT which are broadly consistent with those applied to the household charge.  In addition, certain new and previously unused houses purchased between 1 January 2013 and 31 December 2016 are exempt until the end of 2016.  Also, second hand property purchased by a first time buyer between 1 January 2013 and 31 December 2013 will be exempt until the end of 2016.

In light of the introduction of the LPT, the household charge is to be abolished from 1 January 2013.  While the non principal private residence charge or NPPR will apply for 2013, it will be abolished thereafter.